Steward Hastie, Partner at Isio, comments on the government’s ‘Options for Defined Benefit schemes’ consultation:
DB schemes – a need to reset the balance: We welcome a closer examination on the future of DB and any changes to regulations that support innovation in the market. The main reason that DB schemes have been investing more cautiously is 30 years of regulation driving them down that path. Sponsors have diverted cash to fund this derisking, resulting in much more protection for pension scheme members. We may be too far down the road to unwind this, but steps could be taken to put the brakes on.
To incentivise DB schemes to remain open or to delay transferring to an insurer, overriding legislation is needed that resets the balance. Trustees should have incentives to take modest levels of risk not as little as possible. For example if trustees’ duties were to include improving members’ benefits – with regular distributions of surplus being shared between members and the sponsor. While this would encourage schemes to run on and adopt slightly higher investment return targets, it is more likely this may encourage more use of illiquid debt rather than illiquid equity.
And attempts to appropriate the surplus in the PPF for other purposes are ill-founded. The PPF is an industry-wide self-insurance vehicle which has never had a government guarantee. So it must be right that the benefits of surplus should pass back to the schemes and members that funded it.
If the government genuinely wants more investment in “productive capital” it has to think more about making this an attractive investment rather than twisting the arms of DB pension schemes. Government may find it would be better focusing on insurance companies, as this is where most of pension industry consolidation is happening.
Richard Birkin, Head of DC Pensions at Isio, comments on the government’s ‘helping savers understand their pension choices’ consultation:
Education is key to a prize-winning retirement:
There is a need for clarity around decumulation options and this has been overdue since the pension freedoms were introduced. It is important that as we finally act, the FCA and the Pensions Regulator are aligned to ensure all DC scheme members are offered a similar level of support.
Despite lots of effort in trying to encourage members to make their own investment choices pre-retirement, the majority end up in the default. We can see that at retirement they then struggle to engage with options and, if they do, they sometimes discover that the default investment strategy wasn’t really aligned to their preferred outcome. We are supportive of DC schemes having a default decumulation option, which should be integrated with the pre-retirement strategy.
We believe that Government should encourage more effective financial education and transparency, to help members understand the default approach and the options available to flex this to find a winning solution for them.
It is positive that the Government is encouraging schemes to include access to CDC schemes and intending to create a CDC decumulation market. We believe that it makes more sense to get whole-life CDC schemes working in the market first before expanding into decumulation only CDC.
Claire Whittaker, Isio Actuary and Head of Operational Excellence comments on the government’s ‘Pension trustee skills, capability and culture’ call for evidence:
More robust vetting of Trustees could turn into a solution looking for a problem:
Everyone wants high quality trustees, but it is important to recognise the difference in the role of DB and DC scheme trustees. They might need different solutions.
DB Trustee skills being lacking has been implicated as one of the reasons that schemes don’t invest in UK productive assets. Most DB trustees aren’t investing because of a lack of knowledge or skills but because it isn’t the right thing to do to comply with regulation. They are doing the right thing by members. Whilst the intentions around an accreditation scheme to improve the standard of trustees are positive in principle, it may prove onerous and force lay trustees out. Even worse it could reduce the diversity on trustee boards. We must avoid this turning into a solution looking for a problem.
As more DC schemes edge towards master trusts and consolidation, it makes sense to introduce a more robust process to mandate higher standards to drive improvements or consolidation moving forward.
For all trustee boards, diversity and a broad mix of skills is important. Any kind of assessment of trustee standards must take those factors into consideration. Schemes are most effective when there are multiple trustees from different backgrounds. Concerns that professional trustees may become too dominant could be addressed by requiring that at least two professional trustees are appointed to larger schemes. We support making the bar higher, but care should be taken to ensure we still encourage fresh thinking in schemes in the form of new trustees.
Richard Birkin, Head of DC Pensions at Isio, comments on the government’s ‘ending the proliferation of deferred small pots’ consultation:
No perfect solution but the time to act is now.
We recognise the challenge presented by small pots and welcome ways of improving the process so that savers retirement outcomes are improved and we avoid wasting administration resources. While the proposed consolidator model isn’t the solution we would choose, it is time to pick one and get the ball rolling alongside the rollout of dashboards.
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